Labaton acknowledged it should have disclosed a $4.1 million referral payment and agreed to make several internal changes.

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Labaton Sucharow has agreed to return more than $4.8 million in attorney fees as part of an agreement with a special master who raised public corruption concerns in a $300 million securities class action settlement against financial services provider State Street Corp.

According to court documents that the special master filed on Wednesday, Labaton acknowledged it should have disclosed a $4.1 million payment to Texas attorney Damon Chargois, who had ties to the lead plaintiff, Arkansas Teacher Retirement System (ATRS). The New York-based firm also agreed to make several internal changes, including switching its general counsel and bringing in a former federal judge to review its fee arrangements.

Special master Gerald Rosen, a retired federal judge from the Eastern District of Michigan, urged U.S. District Judge Mark Wolf for the District of Massachusetts to approve the agreement, given Labaton’s “sincere acceptance of responsibility and expression of regret.”

“Labaton acknowledges that its conduct in this case did not meet emerging best practices of transparency, candor, and reliability in its submission of the fee petition in this case,” wrote William Sinnott of Boston’s Barrett & Singal in a supplement filed on behalf of Rosen. “As a result, the Court could not fully discharge its fiduciary obligations to the class members. Labaton has accepted responsibility for its conduct in this case and expresses regret.”

Labaton acknowledged in a statement to Law.com that the “payment was outside the norms of a traditional case-specific referral fee,” and “that our disclosure fell short of emerging best practices.”

Wolf, in Boston federal court, must approve the agreement. The judge brought in Rosen over a year ago to investigate potential overbilling in a $75 million fee request by three lead plaintiffs firms: Labaton, the Thornton Law Firm in Boston and San Francisco’s Lieff Cabraser Heimann & Bernstein. But his investigation revealed Labaton’s undisclosed fee payment to Chargois, then of Chargois & Herron.

Rosen released his report publicly on June, concluding that the three law firms should return more than $10 million to class members, with Labaton contributing as much as $8.1 million.

Labaton fought the report’s findings, insisting that the referral payment was legal and even petitioning the U.S. Court of Appeals for the First Circuit to remove Wolf from the case.

Under the deal, signed by New York partner Christoper Keller, Labaton agreed to return $2.05 million to class members who were State Street investors. The firm also agreed to pay $2.75 million to three additional plaintiffs’ firms whose related cases under the federal Employee Retirement Income Security Act were included in the settlement (Rosen had previously recommended in his report that Labaton pay $3.4 million to the ERISA firms).

Under the special master’s supplement, Labaton acknowledged it should have disclosed the payment to other parties in the case, class members and the judge, particularly since Chargois “did not commit to work on, nor accept responsibility for, the representation of ATRS in the prosecution of the State Street case.”

Rosen previously insisted that the payment could have violated Massachusetts law.

“The Special Master finds, however, that the payment itself to Chargois did not violate the rules of professional misconduct or constitute intentional misconduct,” Sinnott wrote.

Rosen also found that Labaton could remain as lead counsel, and the Arkansas pension fund as lead plaintiff – though he recommended that the ERISA firms be appointed as additional lead counsel.

“Throughout the entirety of this case, we maintained that we were compliant with all federal rules as well as the laws in Massachusetts regarding disclosure of third-party referral payments,” Labaton said in a statement praising the special master’s agreement. “Master concurs in the proposed resolution that the payment made to referring counsel did not violate any rules of professional misconduct.”

But Labaton also acknowledged its error in not disclosing the payment, adding: “We understand the benefit of disclosure to the Court on all referral payments regardless of whether there was a specific directive to do so.”

Among other changes, the firm agreed to:

Discontinue allowing other firms to pay for its staff attorneys, who will no longer be included in billing calculations in a fee petition.

Appoint its general counsel, Jonathan Gardner, to a new position called “head of litigation,” who will “provide proper oversight of all litigation teams.”

Appoint New York partners Michael Canty to general counsel and Carol Villegas as chief compliance officer to “provide advice on ethical issues.”

Create a “settlement team” that includes New York partner Nicole Zeiss, head of the settlement department, to review fee petitions.

Prohibit “bare referral” agreements with other lawyers and require the firm to disclose to the court any fee sharing agreement under the local rules of the Eastern and Southern Districts of New York.

Hire former Chief Judge James Holderman of the Northern District of Illinois for one year “to ensure that Labaton’s retention, fee sharing agreements and other policies concerning fee applications are in compliance with applicable rules and emerging best practices.” Holderman will provide a report within 60 days that Labaton plans to provide the court.

Amanda Bronstad

Amanda Bronstad is the ALM staff reporter covering class actions and mass torts nationwide. She writes the email dispatch Critical Mass. She is based in Los Angeles.

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